February 18, 2007EconomyPublic Policy

Nothing like expensive onions to focus minds

Good roads can help prevent costly meals

This is an archived blog post from The Acorn.

Economists, politicians and ordinary people are united on this one: they see, respectively, high headline inflation figures, elections in key states and the price of onions as something to worry and complain about. The UPA government finds itself in their collective dock, and the economist at the head of it faces a mid-term test.

Whether or not inflation is a symptom of an overheating economy is one debate. In practice, this debate involves criticising the Reserve Bank of India’s monetary policy: tightening necessary, goes one side; unnecessary alarmism, says the other. It’s a good debate, but also a very technical one. The central government, for its part has engaged in variety of short-term measures using blunt tools. It has banned futures trading in some pulses, ostensibly to prevent speculation. It has lowered import tariffs on capital goods, steel, cement, chemicals and edible oils, and waived them entirely on wheat, pulses and sugar. And it has banned their export.

How much the Band-Aid will help is anyone’s guess. Yet there are plenty of things that the government can do to rein in inflation. So clear are these options that both the Economist and Economic and Political Weekly agree on them:

In the longer term, lower and steadier food prices depend on better roads and electricity. At present, about 40% of India’s fruit and vegetable harvest rots before reaching markets. One hope is that the current enthusiasm for organised retailing from Indian firms such as Reliance will lead to huge improvements in supply chains. Hopes would be higher still if retailing were open to foreign giants, such as Wal-Mart, which are currently restricted to launching wholesale operations in India.

To sustain India’s current growth, longer-term measures, such as cutting subsidies and building infrastructure, are needed. [The Economist]

Fragmented markets, lack of proper price discovery, bungling in the management of food stocks and a highly speculative futures market continue to dog the sector. Only long-term structural shifts in agriculture can eliminate the supply-side bottlenecks that are also impediments to a high-growth path. [EPW]

While they do differ on some points—the Economist supports opening up the retail sector while EPW blames speculation in the futures market—they both argue that poor connectivity between markets leads to inefficiencies that ultimately manifest themselves in the form of higher prices. It’s the roads, stupid!

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